In the last Market Overview discussing the Russian economic crisis we wrote: “Credit rating agencies will probably downgrade Russia’s rating to junk status soon.” Indeed, the biggest country in the world has been recently downgraded to junk status, first time in a decade. Will this affect the gold market?
On January 26, 2015, S&P issued a BB+ rating, below investment grade, because “the Russian Federation’s monetary policy flexibility has weakened, as have economic growth prospects.” Other big agencies, like Moody’s and Fitch, also downgraded Russian sovereign debt, but not to junk level.
Lower debt rating means higher borrowing costs. Therefore, the downgrade may aggravate the economic crisis in Russia. Indeed, the ruble lost more than 5 percent after the S&P’s decision. The S&P’ move has increased the risk of investing in Russia and may trigger capital flight, since many global financial institution cannot buy debt classified as junk or invest in such countries. The change of credit rating can also increase the borrowing costs of private or quasi-private companies (indeed, S&P announced last week a number of downgrades to Russian oil and gas companies), and activate clauses in debt agreements causing Russia's repayment deadlines to be brought forward. Overall, the downgrade could costs the country up to $30 billion, according to estimates.
The worsening situation in Russia (partly to the downgrade of credit rating) led the Central Bank of Russia to unexpectedly cut its main interest rate from 17 to 15 percent. It implies that banks were faced with a massive, perhaps too big, liquidity problem, about which we wrote in the last Market Overview. The interest rate cut may help a little, however it risks further growth of the already high inflation and a further decline of ruble.
Summing up, Russia’s economic crisis is more and more severe, which was reflected by S&P’s downgrade and the recent Central Bank of Russia’s move. The interest rate cut will probably entail higher inflation, which could further increase the gold price in Russian rubles (the gold price in rubles surged more than 70 percent in 2014). However the impact on gold priced in U.S. dollars is rather unclear and harder to predict, since it depends on a possible contagion effect. Are you interested what the Russian crisis could mean for the global economy and the gold market? We analyze this issue in more details in our last Market Overview report.
Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor
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